Nov 7, 2017

Axios Pro Rata

By Dan Primack
Dan Primack

I'm excited to let you know that Sinocism's Bill Bishop, one of the smartest minds on China, is moving his weekly must-read newsletter to Axios. Bill will bring his new Axios China subscribers commentary and analysis on the most important U.S.-China news of the week. Sign up here.

Top of the Morning

It can be pretty difficult to figure out what's in the House GOP tax plan, particularly if you keep listening to House GOP leaders. Rep. Kevin Brady yesterday morning said on CNBC that carried interest would be treated as ordinary income if the underlying security was held for two years or less (up from the current one-year threshold). Then the actual mark-up language was released, and the minimum was three years.

But the kicker for PE/VC folks might be the actual legislative language:

Section 3314 - Partnership interest held in connection with the performance of services. The amendment imposes a three-year holding period requirement for qualification as longterm capital gain with respect to certain partnership interests received in connection with the performance of services.

Yup. "Performance of services." Or, put another way, the House plans to codify that carried interest isn't really a capital gain – thus theoretically paving the way for the IRS to make a similar ruling.

• More mark-ups: There is now language that would allow startup employees to defer taxes on exercised stock options or RSUs for up to five years, so long as no public market exists for the company's shares. It's hard to overstate how important this is, as current rules often force startup employees to either remain in jobs they wanted to leave (i.e., golden handcuffs) or give up the value they had helped to create. Some startups have rewritten their own rules to alleviate this problem, but they have been the exceptions rather than the rule.

• What's in a name? SoftTech VC is one of Silicon Valley's oldest dedicated seed funds, launched by Jeff Clavier back over a decade ago. But today it's changing its name to Uncork Capital.

  • Why now? Clavier explains that he didn't give too much thought to the original moniker, outside of URL availability. Today, however, he feels that it doesn't adequately reflect the firm's broadened interests into hardware and frontier tech. Moreover, market research showed that Clavier's firm was regularly being confused with SoftBank, particularly as that firm has gained in prominence.

All hail breaks loose: Word is that the SoftBank/Uber deal remains in stasis. Voting rights agreements remain unsigned, thus no tender launch. Will be interesting to see how Uber CEO Dara Khosrowshahi handles questions about it at the NYT Dealbook conference this Thursday in NYC, which will be his first public interview since taking the job (yeah, I'll be there).

Mouse eats lion? 21st Century Fox recently held talks to sell most of itself to Walt Disney Co. – excluding its news and sports television channels – as first reported yesterday by CNBC. The discussions are not currently active, but this sounds like a "gentlemen, start your engines" situation for everyone from Verizon to CBS to Hulu.

Oh Wilbur: Forbes reports that it can't find billions of dollars claimed by Wilbur Ross, in the Commerce Secretary's efforts to get included on the mag's annual billionaires list. Per Dan Alexander: "It seems clear that Ross lied to us, the latest in an apparent sequence of fibs, exaggerations, omissions, fabrications and whoppers that have been going on with Forbes since 2004."

The BFD

Valeant (NYSE: VRX) said it will return control of Sprout Pharmaceuticals, a Raleigh, N.C.-based maker of a drug known as "female Viagra," to a group of former shareholders.

  • Why it's the BFD: Because Valeant isn't getting a Canadian nickel in upfront payment here, just two years after paying $1 billion to buy Sprout. Instead, it's actually loaning Sprout $25 million to fund initial operating expenses. My back of the envelope math puts the ROI at around 😱. But it's not going away empty-handed: Valeant will receive a 6% royalty on sales of Sprout's flagship Addyi product beginning 18 months post-close, plus an agreement that Sprout's returning owners will drop a lawsuit that accused Valeant of botching the Addyi roll-out and pricing.
  • Bottom line: "The Sprout acquisition capped several years of frenzied debt-fueled deal-making under Michael Pearson, Valeant's former chief executive, and the group now has about $26 billion of net borrowings. The deal is seen as symbolic of the drug-maker's hubris." – David Crow, FT
Venture Capital Deals

• Phoenix Travel Worldwide, a Beijing-based overseas travel company, has raised around $105 million in Series C funding. Backers include CITIC Capital, Haier Capital, Lenovo Holdings, Legend Capital, Juyuan Investment, Yonghua Capital and Silk Road Huachuang. http://axios.link/fd7m

• Monzo, a British challenger bank, has raised £71 million in funding from Goodwater Capital, Stripe, Michael Moritz (via his charitable foundation, Crankstart) and return backers Passion Capital, Thrive Capital and Orange Digital Ventures. http://axios.link/sPAe

• MetricStream, a Palo Alto, Calif.-based provider of governance, risk and compliance solutions, has raised $65 million in growth equity funding. Clearlake Capital Group led the round, and was joined by EDBI and return backers like Goldman Sachs and Sageview Capital. http://axios.link/SsGH

🚑 AnchorDX, a Chinese high-throughput gene sequencing startup, has raised $28 million in Series B funding. 6 Dimensions Capital and Sijia Jianxin Fund co-led the round, and were joined by Arch Venture Partners, Marathon Venture Partners, KingMed Diagnostics and WuXi AppTec Group. http://axios.link/Flbc

• Aquam, a San Diego-based provider of risk mitigation technologies for water and energy transmission and distribution assets, has raised $26 million in growth funding led by NewWorld Capital. www.aquamcorp.com

• Jitterbit, an Alameda, Calif.-based API transformation startup, has raised $25 million in Series C funding led by KKR. www.jitterbit.com

• ShopBack, a Singapore-based cashback-focused e-commerce startup, has raised $25 million in new VC funding. Credit Saison led the round, and was joined by Blue Sky, AppWorks, Intouch, Aetius Capital, 33 Capital and return backers SoftBank Ventures Korea, Singtel Innov8, Qualgro and East Ventures. http://axios.link/fbkL

• Smartkarma, a Singapore-based online marketplace for investment research on Asian companies, has raised $13.5 million in Series B funding. Sequoia India led the round, and was joined by return backers Wavemaker Partners, Jungle Ventures and Spring Seeds. http://axios.link/wTzs

• LogDNA, a San Francisco-based log management platform, has raised $7 million in Series A funding from Initialized Capital. http://axios.link/GWI3

• Opendorse, a Lincoln, Neb.-based athlete marketing platform, has raised $3.5 million in Series A funding. Serra Ventures led the round, and was joined by Flyover Capital and a group of pro athletes like Prince Amukamara. http://axios.link/1lH2

• Mojiworks, a British developer of games for messaging apps like Facebook Messenger, has raised £2.1 million in Series A funding. Balderton Capital led the round, and was joined by return backers Lifeline Ventures and Sunstone Capital. http://axios.link/XJtz

• Pienso, a Brooklyn, N.Y.-based startup that wants to help non-technical people interact with machine learning models, has raised $2.1 million in seed funding. Eniac Ventures led the round, and was joined by SoftTech VC, Indicator Ventures and E14 Fund. http://axios.link/IBRN

Private Equity Deals

🚑 Bioclinica, a Newtown, Penn.-based portfolio company of Cinven, has acquired MDDX Research & Informatics, a San Francisco-based medical research image management platform. http://axios.link/Y5fg

• Evans Food Group, a Chicago-based portfolio company of Wind Point Partners, has acquired Gaytan Foods, a City of Industry, Calif.-based producer of pork rinds. www.gaytanfoods.com

• ICP Construction, a unit of Audax Private Equity portfolio company ICP Group, has acquired Master Coating Technologies, an Eagan, Minn.-based manufacturer of specialty architectural coatings. www.icpgroup.com

• ISA TanTec, a leather-maker owned by of Navis Capital Partners, has acquired a "major stake" in Italian tannery Scabrenta. www.liteleather.com

• Madison Dearborn Partners has agreed to acquire a 51% stake in the U.S.-based fee business of AmTrust Financial Services (Nasdaq: AFSI) at an enterprise value of $1.15 billion. http://axios.link/pO2I

• Magnitude Software, an Austin, Texas-based portfolio company of Audax Private Equity, has acquired Agility Multichannel, a UK-based provider of product information management software. www.magnitudesoftware.com

• Quad-C Management has acquired Galleher Corp., a Santa Fe Springs, Calif.-based floor covering distributor. www.galleher.com

• TorQuest Partners has invested in The TEAM Cos., a Burbank, Calif.-based provider of payroll and tech services to the advertising and entertainment markets. www.theteamcompanies.com

• Warburg Pincus has acquired a 21.3% stake in Cyren (Nasdaq: CYRN), a McLean, Va.-based cybersecurity-as-a-service company, via a private placement of 10.6 million shares at $1.85 each. www.cyren.com

Public Offerings

• Avast Software, a Prague-based security software company backed by CVC Capital Partners and Summit Partners, has hired Rothschild to manage a London IPO that could come in the first half of 2018, according to Reuters. http://axios.link/BbPx

China Literature, a Chinese online publishing and e-book company majority-owned by Tencent, raised $1.1 billion in its Hong Kong IPO. Other shareholders include The Carlyle Group and Trustbridge Partners. http://axios.link/XPMb🚑 Erytech Pharma, a French developer of therapies for pancreatic cancer, set its IPO terms to 4.26 million American depository shares being offered at $23 to $24. It would have a fully diluted market value of around $415 million, were it to price in the middle of its range. The pre-revenue company plans to trade on the Nasdaq under ticker symbol ERYP, with Jefferies listed as left-lead underwriter. Shareholders include Baker Brothers and Auriga Ventures. www.erytech.com• Lyft's chief operating officer Rex Tibbens is stepping down, as the ride-hail company continues to prepare for a 2018 IPO, Axios scooped last night. Meridian Bank, a Philadelphia-area commercial bank with 22 locations, raised $40 million in its IPO. The company priced 2.35 million shares at $17 (low end of range), and will trade on the Nasdaq under ticker MRBK. Sandler O'Neill served as lead underwriter. www.meridianbanker.com• Stitch Fix would have a fully diluted market cap of around $2.16 billion, were it to price in the middle of its IPO range later this week. Apologies for leaving that number out in yesterday's blurb.

Liquidity Events

• Proofpoint (Nasdaq: PFPT) has agreed to acquire Cloudmark, a San Francisco-based provider of cybersecurity solutions for messaging services, for $100 million. Cloudmark had raised around $39 million from firms like Summit Partners, FTVentures, Nokia Growth Partners and Ignition Partners. http://axios.link/J2wL

More M&A

• General Electric (NYSE: GE) is exploring strategic options for its $25 billion aircraft leasing business, including a possible sale, according to Reuters. http://axios.link/lyck

🚑 McKesson (NYSE: MCK) has agreed to acquire RxCrossroads, a health services unit of CVS Health Corp. (NYSE: CVS), for $735 million. http://axios.link/VsKH

Fundraising

• Sunstone Technology Ventures has closed its fourth European VC fund with €112 million and it's a new growth opportunity fund with €47 million. www.sunstone.eu

It's Personnel

• Hayley Barna, co-founder and former CEO of Birchbox, has been named a New York-based general partner with First Round Capital. She had joined the VC firm two years ago as a venture partner.

• Todd Lutwak is leaving Andreessen Horowitz, where he serves as a partner and head of the consumer market development team, a firm spokeswoman confirmed to Axios. He joined Andreessen Horowitz in 2012 from eBay, and does plan to take a new board seat on the firm's behalf (the deal is not yet announced).

• Pritzker Group Private Capital has promoted Chris Trick to principal, with a continued focus on investments in the manufactured products space. www.pritzkergroup.com

Final Numbers: Activist targets in Europe

More from Skadden:

  • "Activism in the U.K. surged as Brexit impacted currency markets in 2016. This year will likely see fewer proxy fights, but overall activity may marginally exceed 2016's numbers."
  • "Larger companies have drawn less attention in 2017, with a higher volume of sub-$250 million companies targeted in the first three quarters than in the whole of 2016. That may give a clue as to where activists think the U.K. leaving the EU is likely to hurt most."
Dan Primack